Investments in peer-to-peer lending models have dramatically outpaced the alternative equity market, according to the latest research from West One Loans.
In the 12 months to Q1 2013, private investments in short-term secured loans generated an average yield of 11.2%. Over the same period, FTSE Alternative Investment Market-listed shares provided an average yield of only 0.96% – 11.6 times lower than that of secured alternative lending.
The total annual return generated by secured peer-to-peer investments in short-term loans is 16.9 percentage points above that of the FTSE AIM. Strong yields, and capital secured against real estate, mean that secured peer-to-peer investments provided total returns of up to 11.2% in the year to Q1 2013. Meanwhile, AIM-listed shares over the same period saw weaker dividend yields and capital depreciation, leaving total return from an alternative equity investment at -5.7%.
Mark Abrahams, director at West One Loans, claimed that equity investments of all sorts are an increasingly risky source of income.
He said: “The medicine of quantitative easing is addictive – and not necessarily the best cure. Even the slightest hint that the authorities could re-impose economic reality is met with panic on exchanges across the world.
“In the hunt for yield, peer-to-peer models are the future. Lenders and borrowers no longer need to squeeze economic activity through Victorian high streets. And many sophisticated investors are flourishing in that environment. The trend for disintermediation is accelerating.”
During the period between February 2011 and March 2013, total returns from secured peer-to-peer loans are not only far higher, but far more stable than their equity equivalents, West One Loans claims. Over this two year period, returns from secured peer-to-peer loans showed a 3% maximum variation, compared to a 55.5% maximum variation in the total annual return from the FTSE AIM.
Abrahams said: “Equities have their place, but when it comes to funding the most entrepreneurial small businesses, alternative lending has a growing importance too. Peer-to-peer lending is an increasingly popular way to gain access to exciting projects, while secured loans can give investors the guarantee they need that their capital investment is safe.
“Short-term secured loans can offer sophisticated investors the chance to chart their own approach to small business and development projects. Critically, this is without the risk of owning a portion of these ventures, as is the case with many, far more volatile alternative equities. Equally, by their very nature secured loans don’t expose investors to the risk associated with unsecured peer-to-peer models.”